The Unforeseen Consequences Of China’s Insatiable Oil Demand

By Tim Daiss, an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets and geopolitics for Forbes, Platts, Interfax, NewsBase, Rigzone, and the UK-based Independent (newspaper) as well as providing energy markets analysis for subscription newsletters. I’ve also authored geopolitical reports and analysis for Singapore-based consultancy Enerdata. Originally published at OilPrice

While it’s true that China’s crude oil imports recovered slightly in July, it was still among the lowest so far this year due to a decline in demand from smaller so-called independent “teapot” refineries.

However, for the first seven months of the year, China imported some 8.98 million barrels per day (bpd) of crude oil, up 5.6 percent from a year earlier. Total natural gas imports, including both pipeline gas and liquefied natural gas (LNG), rose to 7.38 million tonnes during the same period, up 28.3 percent from a year ago, according to customs data.

Moreover, amid both economic growth as well as Beijing’s mandate that gas make up at least 10 percent of the country’s energy mix by 2020 to offset the effects of rampant air pollution from dirtier thermal coal power production, the long term trajectory for both China’s natural gas consumption, as well as oil usage, will continue to increase, posing both a geopolitical and financial dilemma for the country that the U.S. and many western powers grappled with for decades.

Gas Matters

Going forward, China’s gas demand is projected by the IEA to rise by 60 percent between 2017 and 2023 to 376 billion cubic meters (bcm), including a spike in its LNG imports to 93 bcm by 2023 from 51 bcm last year. The IEA has also projected that China will become the world’s top natural gas importer (both pipeline and LNG) by next year.

This marked increase in Chinese LNG procurement has changed the global LNG market from one that was projected to remain in a supply overhang scenario until around 2022 or even later to one that is now projected to have possible shortfalls of the super-cooled fuel around the same time frame. It has also ushered in new confidence for global LNG producers and talk of pushing ahead more greenfield LNG projects to meet this demand, a possibility unheard of just a year ago. Related: Oil Prices Hit 7-Week Low As Trade War Heats Up

This increase in gas usage will also mean that China’s domestic gas output, though it will be the world’s fourth largest gas producer by 2023, will be unable to keep up, with China increasingly becoming more reliant on gas imports from both established LNG producers like Australia, the U.S. (current trade tensions notwithstanding) and Russia, but also more geopolitically volatile producers such as Qatar, still the world’s top LNG producer, Yemen, Oman, Papua New Guinea, in time Mozambique, and others.

Stellar GDP Growth

However, even more problematic for China than its increasing gas consumption projections will be its continued oil thirst. China’s oil usage continues to increase amid a GDP growth rate that has been the envy of the western world. Admittedly, China’s economic growth is slowing but the question has to be asked, slowing from what level?

China had double-digit real GDP growth for much of 1980–2005, and energy demand more than tripled during that time. In 2010, China’s GDP grew at a stellar 10.61 percent, followed by 9.4 percent the next year. In 2012 and 2013 China’s GDP growth for both years reached nearly 8 percent, followed by an average GDP growth rate of 6.925 percent between 2014 and 2017. China’s economic growth rate did slip in Q2 this year but it still came in at an impressive 6.7 percent. The U.S., for its part, has not posted a GDP growth rate above 5.12 percent since 2006.

Oil Thirst Remains Problematic

China surpassed the U.S. in annual gross crude oil imports in 2017, importing 8.4 million bpd compared with 7.9 million bpd for the U.S. China had become the world’s largest net importer (imports minus exports) of total petroleum and other liquid fuels in 2013.

Last year, 56 percent of China’s oil imports came from OPEC members. Though that was a marked decline from a peak 67 percent in 2012, it still represents over half of the country’s demand derived from OPEC members. Moreover, as China prepares to decrease imports of U.S. crude oil, OPEC imports, in addition to Russia, will increase to replace lost U.S. barrels.

This over reliance on imports from individual OPEC members puts China in a geopolitically precarious situation.

Though China could indeed see oil demand growth slow in coming months, in part due to the ongoing trade row with the U.S., in the mid to long term China’s oil consumption thus its reliance on foreign oil will continue to grow. The IEA said recently that China’s oil demand could reach 15.5 million bpd by 2040, after peaking in 2030.

Along with supply risk attributed to over reliance of imported foreign crude, there is the issue of transfer of wealth, again something that plagued the U.S. for nearly 40 years and forced its hand as it became involved in countless military endeavors in the Middle East.

Oil demand problems for China are being exacerbated by its maturing onshore oil fields and the inability to discover and develop new fields in sufficient quantity to offset these production loses – perhaps one reason China has pushed so hard recently in the thought to be oil and gas rich South China Sea.

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26 comments

  1. The Rev Kev

    No wonder China balked as US demands that they stop importing oil from Iran. That would undercut the entire economy. I guess that this accounts too for the Chinese electrifying their bus fleets and country adding a second oil pipeline from Russia as well as the one to Kazakhstan. I can’t see it lasting as we are well past the point of peak-recoverable oil and China’s demand is not supposed to peak for another two decades.
    Considering that the fracking boom in the US will collapse in the not too distant future, you will eventually have two major powers jockeying for the world’s remaining oil fields and neither being in a position to back down. The US is already trying to cut Iranian oil exports to zip. What if a future US administration tries to cut Chinese oil imports to near zip? That could get real ugly real fast. The only question then would be whether the flash point would be the South China Sea or the sea lanes to Iran and Qatar.

    Reply
    1. WobblyTelomeres

      What if a future US administration tries to cut Chinese oil imports to near zip? That could get real ugly real fast.

      Isn’t that what prompted the Japanese attack on Pearl Harbor? Ugly indeed.

      Reply
      1. Shane Mage

        That would be the greatest of blessings to the whole world, especially the Chinese working class. Especially if followed in short order by the virtual elimination of petroleum, coal, and methane extraction throughout the world.

        Reply
        1. Pym of Nantucket

          Don’t hold your breath. The human story of climate change denial still has a few more sad chapters at the end of the book, IMO. Once we get to mass human migration there is a chance that humans will be ready to face climate change.

          Reply
    2. John Rose

      Please elaborate on the statement, “the fracking boom in the US will collapse in the not too distant future”

      Reply
      1. oh

        Last time, as I recall, it resulted in a certain unpleasantness to the US naval and Army Air Force installations at and around Pearl Harbor, Hawaii

        And it resulted in unpleasentaries being exchanged by the US and Japan for several years.

        Reply
  2. vegeholic

    If only they would transition to a modern 21st century service economy with more financial planners and feng shui consultancies all would be well. This would decouple their growth aspirations from the inconvenience of energy consumption. /sarc

    Reply
  3. TG

    Indeed. But obviously the problem is China’s one-family one-child policy. If they had only continued with Mao’s early policy of encouraging large families (“Strength through numbers”) then they might have over four billion people by now, and obviously all those extra hands and minds would automatically solve all their problems and allow them to have a high standard of living with no environmental cost. Because as we all know, rapid population growth cannot possibly be of any environmental concern at all, what little effects it might have can easily be ameliorated by recycling the occasional plastic water bottle or attending green-day rallies or voting against Donald Trump. Because saving the environment has nothing to do with calculating the total amount of resources consumed and doing the math on what plausible and practically could be actually reduced by conservation – no, that sort of thinking is dangerously close to being racist, or fascist, or literally Hitler. We can have a high standard of living for an arbitrarily large number of people and a pristine environment but only if we think correct thoughts, and continue to boost the population higher and higher so that we don’t run out of workers. And anyhow, once we have achieved utopia and the entire world has the standard of living of Norway then everyone will automatically have fewer children, which means that we don’t need to worry about the effects of the rapid population growth that we are actually having today. So obviously population growth should not be discussed. If you must, you may obliquely say something like ‘oh sure, that’s important too,’ but only to deflect the issue so that you can continue on ignoring it.

    Reply
    1. cbu

      Well, I guess in that case the Chinese economy would indeed be growing at the official 6%+ a year, instead of at most 3% a year as Michael Pettis claims.

      Reply
    2. animalogic

      “And anyhow, once we have achieved utopia and the entire world has the standard of living of Norway…”
      Absolutely — & by then Norway will have become the summer holiday destination, kind of like Florida today.

      Reply
  4. djrichard

    So US had a trade deficit of $375B with China for 2017. If I understand the numbers right, it sounds like oil is a primary driver for that.

    According to the article, China imported 8.4M bpd for 2017. Apparently almost 360K of that is from the US (according to the link below) so let’s just call it an even 8M bpd. And assume that the oil not coming from the US is priced in USD. So at least some of the dollars imported by China by selling us goods are used for that. Assuming $50 per barrel, that comes out to $146B per year.

    Which is roughly 40% of the trade deficit. Is my reasoning off?

    https://www.reuters.com/article/us-usa-trade-china-oil/china-surprises-with-threat-on-u-s-energy-exports-idUSKBN1JB301

    Reply
    1. John k

      I get 8b at 60/b…. 360 k b/d x 365 d x 60 $/b = 8 billion
      Which slightly reduces the merchandise deficit, as intended.
      They also buy all the us gold production they can get for the same reason.

      Reply
      1. ewmayer

        I think djrichard’s point – if I read it correctly – is that much or most of the *total* Chinese oil imports are consumed in the making/shipping of products for export, with the US of course being a huge recipient of same. IOW, all those fish caught in Alaska and shipped across the Pacific for processing into fish sticks in China and the re-export back to US in little boxes are maybe netting the manufacturer a bit more profit than if they did the breading in the US and saved the 2 transoceanic trips, but that exploitation of underpaid Chinese labor is contributing to global warming.

        Also note that the article’s “China had double-digit real GDP growth for much of 1980–2005, and energy demand more than tripled during that time” is a beautiful confirmation of the truism “behind every unit of GDP is a unit of energy”.

        Reply
  5. Susan the other

    Mmmmm. Iran shares a huge gas field in the gulf with Qatar, Yemen is now producing LNG, it just so happens that the South China Sea has an enormous gas field; of course it is common knowledge that Gaza sits on the shore of another massive natgas field claimed in part by Egypt, there’s one offshore at Lebanon, we have categorized both Iranian oil and Venezuelan oil to be heavy dirty oil; Canadian shale is also heavy dirty glop. I think I see a pattern here. But this piece is trying to make it sound like LNG is outcompeting oil. I doubt it. China’s oil demand is butting up against the global warming emergency and it is out of control. What if GW was so dire and the politics so asinine and volatile that a plot was hatched to make the US Pres. look like a pompous twit so XI could have the cover to scale back China’s massive and filthy industrialization and slow down all their greedy suppliers? What if the Donald were, like little George, really a closet environmentalist? All the hot spots are fighting to control energy. And it is getting very bloody and ruthless (Yemen, Gaza, etc.) Yet oil is still plentiful. There’s something else going on here.

    Reply
    1. Synapsid

      Susan the other,

      Canadian oil sands not Canadian shale.

      The shales in Canada yield light crude and condensate, especially condensate, just like the shales in the US do.

      Reply
  6. Jak Siemasz

    The largest LNG export terminal in the US in Sabine Pass, LA was originally built by Cheniere Energy to import LNG to the US because the US was running low on natural gas. Technological advances resulted in fracking and horizontal drilling which caused untold sums to be invested by Cheniere to reverse the process and turn their facility into an export terminal. Fifteen years ago PA produced a whisper of natural gas and today produces 25 BCF a day and could probably produce more if the infrastructure was in place. Not making a prediction or expecting some deus ex machina solution to the energy situation but just saying it is difficult to predict long range.

    Also, does China have the will to go bigly nuclear to help meet its electricity needs?

    Reply
  7. Roger Boyd

    Or China could ramp up electric vehicle usage through incentives and guidance, curtailing its need for ever increasing amounts of oil …

    “The size of China’s vehicle market, now larger than the US, is one reason for the surge. Its government is the other. “Policy is the underlying driver for electric vehicle growth around the world,” the International Council on Clean Transportation reports in a May white paper on the subject. And no one has committed to EVs like China”

    “The US is encouraging EVs by funding basic research, general pollution and fuel efficiency standards, and a $7,500 tax credit for EVs. By contrast, China has national policies to build the EV ecosystem at every level. The country’s financial incentives to buy EVs, encourage manufacturing, and build out charging infrastructure are the most robust in the world, the ICCT says.”

    Not too stupid, those Chinese leaders …

    Reply
  8. Scott1

    Food prices in the US are going up. A measure of inflation people feel every day. Accelerated crises at 7 Billion make it look like the previously predicted effects of overpopulation at 9 million, considered the maximum sustainable number.
    I need to know the fuel to food ratio for US agricultural production that directly & indirectly feeds Americans.

    What is the food to fuel ratio in China?

    Alternatives for airliner fuels are in early stages. Think of potato BTUs.
    Civilization exists as the result of excess energy. Where is the most consistent civilization found world wide in all borders? No place is outside of some border.
    Lot of low quality of life border enforced or liked entities. Some have more civilization than others.

    You may well only want to stay at the airport hotel.
    If I were UN Secretary General I would establish UN offices on all International airports and develop system of sustainable yam based Btu go in a fuel tank generation that is designed as well to integrate so food production is circle ramped up.

    I’ve seen a number of electric road concepts. The electric road that becomes the international standard in roads is something to die for.
    Nuclear Power, well Sun shines everywhere and if you have efficient light bulbs and hang your clothes from a line and a few other things like superconductor transmission lines and superconductor motors we can buy some time.

    US influence at the UN is currently negative.

    Reply
  9. Larry Y

    My understanding is that China (especially provincial and other local governments) see the auto industry as a jobs program. They tore out bike lanes, banned electric bikes, and under invested in mass transit until about ten years ago.

    Central government remedies like higher gas taxes, gas guzzler tax (SUVs are popular due to status), etc. would impact the domestic auto industry. Mileage requirements are a problem as foreign manufacturers are reluctant to share the latest tech. So, the compromise is electric vehicles – but the tech isn’t quite there, hence the offer to let Tesla in without the normal joint venture and technology transfer requirements.

    Reply
  10. drumlin woodchuckles

    Well . . . . among all the unforeseen consequences, one onrolling consequence can be seen very clearly: yet more burning of yet more oil and yet more carbon skydumping.

    Reply

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